Ever wonder about the difference between the benefits of short term vs long term properties? Balancing your investment portfolio is an ongoing task. To optimize your gains, you’ll need to fully understand the differences between long-term and short-term investments. They both serve a purpose, but you may need to focus on one over the other to reach your financial goals.
Long Term Investing: Overview
Long-term investing includes any asset you hold for more than 12 months. Technically, a year and a day would qualify as long-term, but most investors have their investments for at least three to seven years or more. Real estate is one of the most common long-term investments. Many people buy property as an investment they can hold for years as it appreciates over time. Other long-term investments include:
Stocks
Bonds
Retirement savings accounts
Any asset or financial instrument that is held for longer than a year
A long-term investment plan can handle a higher level of risk because it has more time to bounce back after incurring losses. In most cases, long-term investing should be reserved for funds that you don’t plan on needing for ten years or more.
Short Term Investing: Overview
As you can expect, short-term investing involves a shorter time horizon and typically holds assets for less than a year, although you can keep some short-term investments for up to three years.
Short-term investing is attractive to investors who want to make capital gains quickly. Their short-term nature is fueled by volatility and knowing the best time to buy or sell, so it usually requires a good amount of investment knowledge. Almost any asset could be short-term, but they’re commonly stocks, high-yield savings accounts, corporate bond funds, treasury bills, or money market accounts. These are highly liquid investments that are easy to convert into cash or sell in a short amount of time. Short-term investments deliver less of a return, but the tradeoff is that you can access your money quickly if you need it.
Is it Better To Invest Long-Term or Short-Term?
Investing long-term or short-term depends on investment goals, risk tolerance, and time horizon. One strategy is not necessarily better than the other, but each is better suited for particular wealth-building purposes. A fully optimized portfolio should have a certain amount of both long-term and short-term investments to achieve the best results. The right ratio for you will depend on your specific financial situation and how aggressive you want to be.
Capital Gains for Long-Term and Short-Term Investing
One significant difference we haven’t mentioned between long-term and short-term investing is the tax rate for income taxes. When you sell a capital asset for more than what you originally paid, it results in a capital gain. The term capital assets cover a broad range of items. Still, it refers to any asset owned for investment or personal purposes and has a useful life longer than a year. Some investors are taught that capital gains are taxed more favorably than other forms of income, but that’s not always true. It’s vital to understand capital gains taxes as they could affect your profit margin and your decision of when to sell. Long-term capital gains are taxed according to graduated levels for taxable income at 0%, 15%, or 20%. Most taxpayers that report long-term capital gains on their taxes pay a tax rate of 15% or lower. Short-term capital gains are taxed at the same rate as your regular income. Depending on your tax bracket, that can be anywhere between 10% to 37% in 2022. But it is best to consult with your tax advisor.
Pros and Cons for Long-Term Investing
A key benefit to long-term investing is less risk than short-term investing. A longer time horizon gives your assets time to recover from a down-market. If you’re planning to hold an investment for 20+ years, going through a recession around year seven will not be catastrophic. We know the economy goes through these up-and-down cycles, and you’ll be up in the long run.
When Should I Choose Long-Term Over Short-Term Investing?
It should be no surprise that the timeline for your financial goals is the most significant deciding factor when choosing long-term or short-term. Investing long-term is brilliant if you have a sum of money that you can live without for ten years. If you’re at least twenty years away from retirement, long-term investments like stocks or investment properties are a great way to slowly build wealth over the years. If you may need to access money in the next seven years, keeping your portfolio at a medium level of risk and liquidity is usually advised.
The Takeaway
Both long-term and short-term investing can be a suitable way to achieve your financial goals.. In most cases, a well-balanced blend of both investment strategies is what you should strive for. For short term investment opportunities please feel free to reach out to me directly at kelly.colley@patriotfamilyhomes.com
